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Allens Arthur Robinson

Focus: Capital Markets – September 2003

Ethical issues disclosure on investment products

In brief: The Australian Securities and Investment Commission recently released draft guidelines for issuers of investment products relating to the disclosure of labour standards, environmental, social and ethical issues when making a decision about an investment. Partner Chris Schulz(view CV) and Lawyer Naomi Lindsay examine the guidelines.

Draft guidelines

The Australian Securities and Investment Commission's (ASIC) draft guidelines were released in accordance with the ethical disclosure requirements of the Corporations Act 2001. Once the guidelines are finalised, any Product Disclosure Statement (PDS) that makes any claim about labour, environmental, social or ethical standards must comply with the guidelines when selecting, retaining or realising an investment.

The guidelines have three main objectives:

  • to enhance a consumer's ability to compare investment products in relation to these ethical issues through greater disclosure;
  • to provide industry with greater certainty about how it can meet the new disclosure requirements; and
  • to ensure that products are 'true to label' and do what they say they do.

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How will the guidelines apply?

The new guidelines adopt a 'non-prescriptive, principles based approach'. They will apply to products with an investment component – including those offering multiple investment options – made up of different asset classes and where the issuer devolves all or part of the investment decision-making to others. Importantly, a PDS must state explicitly where labour standards, or environmental, social or ethical issues are not taken into account when selecting, retaining or realising an investment. The guidelines are therefore not limited to those funds that market and promote themselves as taking into account labour standards or environmental, social or ethical issues.

A PDS covering multiple products or options should disclose the extent to which each product or option takes into account labour standards or environmental, ethical or social issues. This does not, however, mean that a separate PDS is required for each investment product or option. If the extent to which these issues are taken into account varies between asset classes, the benchmark percentage of each asset class as a proportion of the investment product, must be disclosed, as well as the nature and extent of the variation.

Positive disclosure about the extent to which labour standards or environmental, social or ethical issues are taken into account is required wherever investment products are sold to retail consumers.

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What issues must be disclosed?

If labour standards are, or may, be taken into account when making decisions about an investment, the PDS must have information on what those labour standards are. It must be made clear to consumers that there is no predetermined view, unless it financially affects the investment, about taking into account labour standards and/or what is regarded as a labour standard.

The PDS must set out the actual environmental, social or ethical issues that are taken into account. The amount of detail in relation to these disclosures will vary from product to product.

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Level of disclosure detail

The principles below have been developed by ASIC as a guide as to how detailed the disclosure of these issues should be:

  • the Section 1013D test requires that the PDS must include such information as 'a person would reasonably require for the purpose of making a decision, as a retail client, whether to acquire the financial product';
  • the more a product is marketed on the basis that such 'ethical' matters are taken into account in making investment decisions, the more detail is required;
  • if the PDS claims that investment decisions are based on goals about labour standards or environmental, social or ethical issues, some ways of measuring how far such goals are met should be disclosed, including the methodology used and weighting; and
  • care must be taken in all cases to adequately define the terms used, and to explain whether a policy is definitive or subject to qualifications.

ASIC has included in its guidelines some examples of key international documents that set out the standards and considerations that some investment funds have sought to assess and measure. These include the Global Reporting Initiative standards promulgated by Standards International, international labour organisations and United Nations declarations.

Comments on the draft guidelines can be lodged before Wednesday 15 October 2003. ASIC has stated that once the submissions process has been completed, the guidelines will be finalised and released as soon as possible. The guidelines will apply to every PDS dated on, or after, 11 March 2004, or supplemented on, or after, that date by a supplementary PDS, or given to a person on, or after, the same date. The guidelines will be reviewed after two years to ensure that they meet ASIC's objectives.

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For further information, please contact:

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